Don’t Bet Your Future on the Political Winds

By Don McDonald - Summer, 2018

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Humans naturally look for simple explanations for complex systems. Few systems upon which we rely for our long-term well-being are more perplexing than fluctuating stock prices. We seek to find simple reasons to explain the market in the hope that we might be able to use that information to predict future market direction.

Since politics is an omnipresent part of our lives, we want to believe that our political choice might have some effect on our financial future. A perfect example was the so-called Trump market rally in 2017. This moniker was foolish for several reasons. First, no single individual can change the business climate. Even if they could, that change could not possibly occur quickly. If you want to attribute the market’s rise in 2017 to anyone, it would have to be someone who governed before 2017.

There is widespread belief that a pro-business (Republican) U.S. President should be better for the stock market than a Democrat. Yet, when you compare the average annual return under presidential administrations since 1929, market returns have been at least twice as high when a Democrat is in the White House as during Republican presidencies. Even with these averages, it’s almost impossible to show a direct cause-and- effect linkage between political affiliations and market performance.

In truth, there is no person, group, or even nation that has the power to change the direction of our global economy (and therefore the price of the stocks that represent a significant portion of the economies’ value). World economics is just too big and powerful. Yes, politics can affect markets on a smaller scale. Venezuela is the most recent example. Bad government policy can temporarily destroy a market, as can dramatic world events.

Even major geopolitical occurrences generally had no lasting impact on the global economy. The Nazi invasion of France in 1940 and Japan’s attack on Pearl Harbor at the end of 1941 had significant negative impacts on the stock market. Yet, despite the enormity of a globe-spanning war, the Dow Jones Industrial Average was back above its pre-war highs by January 1943. Even more surprising, given the destruction wrought on much of Europe and Asia, Index Fund Advisors Inc. found that a globally-diversified portfolio of stocks gained about 300 percent between 1938 and 1945.

Other major events have had a market impact that didn’t last long. In the wake of the attacks on 9/11, stock prices plunged dramatically. But, just 15 months later, the S&P 500 had posted gains. Many expected that the subsequent war in Iraq would set off an even more dramatic sell-off. Ironically, the market turned higher the day fighting began, and stocks climbed for much of the next five years.

Political events can and will impact securities prices in the short run. Playing the markets for short-term gains is not investing, it’s gambling. Real investors should have little to fear from political decisions because there is little evidence that political machinations have ever had a long-lasting impact on the value of the global stock market.

So, enjoy (or suffer through) the political process, but stop worrying about the effect one candidate or another might have on your investment portfolio. If you have created a science-based, globally diversified portfolio of equities and high-quality fixed-income investments—based on your tolerance and need for risk—you will likely do well.

It is possible that a politician could provoke a total global conflagration on a scale never before witnessed. However, should that happen, it’s unlikely that the survivors will be thinking about their portfolio losses.

The host of the nationally syndicated Don McDonald Show for over 20 years, Don now co-hosts Talking Real Money with Tom Cock on Seattle’s KOMO radio Saturdays at noon (talkingrealmoney.com). Don also publishes the investing magazine, real investing journal (realinvestingjournal.com).